The Fiduciary Investors Symposiums are designed to examine the management of fiduciary assets in both investment strategy and implementation, including the latest thinking relating to asset allocation, risk management, beta management and alpha generation.

Super system has lost its ‘warmth’: Prugue

Superannuation funds need to do a better job of managing pension liabilities, rather than focusing on peer benchmarks, according to Rob Prugue, former senior managing director and chief executive of Lazard Asset Management Asia Pacific.

Prugue spoke plainly to the audience at the Fiduciary Investors Symposium about challenges faced by the $2.7 trillion industry in providing adequate pension outcomes to members and the limitations of default superannuation options.

“If you think about why superannuation was introduced, it was as a measure to take away the levy of retirement, if you like, as a demographic time bomb was clear even then,” Prugue said. “We’re now there. Now we have a dozen funds that are only cash-flow positive, and the rest are either flat or increasingly negative,” he said.

“The question I really ask myself is, if we were to start today, and we know of the future and we know what the demographics are, would we be creating superannuation as it stands today? I would fathom a guess that most of us would say no.”

Prugue, who announced in February he was departing Lazard, said the typical balanced fund option for superannuation members was insufficient for outcomes.

“A balanced fund represents CPI plus two, has one in seven years’ negative returns and a drawdown of 10 per cent,” he said. “Why is that a lie? Because the allocation is consistently at 60/40. I’m sorry, that’s a lie. There’s no way you can give and determine those returns by holding a static asset allocation between growth and defensive assets.”

A variable annuity represents the closest to what a balanced fund is meant to represent “because their asset allocation will shift because they are managing superficially to a contracted to a CPI-plus return, whether or not they get it.”

Prugue also noted that as industry superannuation funds have internalised some of their funds management functions, they have become agents in the system as well.

“The research is that we’re really fooling ourselves, that superannuation the way it stands, at 9 or 12 per cent will make a difference,” he said.

“Even if we go from 9-12 per cent, we’ll mis-invest the additional 3-4 per cent, because I don’t think we’re doing a good job. I think that a lot of us in this room are all agents, including industry funds I might add. Particularly those industry funds who has internalised the teams. Once you internalise funds management, you cease the right to call yourselves a principal, because now you’re a manager.”

Prugue urged audience members to look to performance metrics beyond being “in the top quartile,” and also warned that if the superannuation industry didn’t look to improve its performance, there was the risk of legislation by government to fix it.

“We’ve lost something as our business has grown to $1 trillion plus,” Prugue said.

“We lost the warmth, we’ve lost the connection. How much have we lost the connection? When I started in 1989 at AMP, we won a $10 million fund, and we had cake and champagne to celebrate it. … And again, we’ve lost the warmth, the connection, and we’re taking about people’s retirement.”

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Investment Magazine provides in-depth, monthly analysis of trends and developments for all the businesses in which superannuation funds engage‚ including asset allocation, investment manager selection, custody and fund accounting, member administration, group insurance and compliance.